Wednesday, March 31, 2010
6:44:16 PM EDT

Stocks Derailed By Employment Forecast

by
Todd Shriber

A glum employment outlook from ADP that showed employers surprisingly cut jobs in March helped push stocks lower on Wednesday with the Dow Jones Industrial Average losing almost 51 points to close at 10,856.63. The S&P 500 absorbed a loss of nearly four points to settle at 1169.43 while the Nasdaq closed below the critical 2400 level after losing about 13 points to close at 2397.96. Equities were lethargic for the most part on Wednesday, until another late-day sell-off kicked in around 2pm Eastern time, worsening the day's losses.

Stats Table

Optimism had been high that Friday's monthly jobs report would show employers added jobs in March, but the ADP Employment Report showed employers cut another 23,000 jobs this month. While that is the smallest monthly decline in two years, the news was nothing to get excited about as most observers were forecasting an addition of 40,000 new jobs in the ADP report. That probably put investors in a pensive state mind ahead of the Labor Department's jobs number, which many economists are expecting to show an increase of 185,000 new jobs.

Friday's number may still prove to be better than today's ADP report because the government report reflects weather-related improvements in hiring and the addition of census workers, while the ADP does not include those numbers. Of course, census jobs are temporary jobs and the economy is going to need more than temporary jobs to truly pick up steam.

ADP Chart

The Case-Shiller Home Price Index did nothing to encourage a cheery mood on Wall Street today as its January report showed home prices in 20 U.S. cities fell by 0.4% in January from December. Today's number was not seasonally adjusted. Los Angeles was the only city of the 20 included in the survey to show improving home prices in January. On a seasonally adjusted basis, prices rose 0.3%.

Compared with January 2009, prices were lower in 11 of 20 cities, with Las Vegas sporting the biggest decline with a drop of 17.4%. Home prices in Charlotte, Las Vegas, Seattle and Tampa hit their worst post-financial crisis levels, according to press reports.

Home Price Chart

The Dow backed off an 18-month high, but energy names did get a boost after President Obama said he would permit drilling off the East Coast. A federal ban on drilling in waters off both the East and West Coasts expired in 20008 and while the Obama plan is certainly better than not exploiting these resources at all, it does keep explorers from drilling within 125 miles of Florida's coastline and cancels the development of Alaska's Bristol Bay.

According to Bloomberg News, the U.S. Minerals Management Service estimates that Alaska's Outer Continental Shelf has 26.6 billion barrels of recoverable oil, seven times the estimate for the East Coast, and 132.1 trillion cubic feet of natural gas. If nothing else, those numbers indicate the decision to stop development at Bristol Bay is vexing at best.

The news led to a mixed day for oil stocks. Exxon Mobil (XOM), the biggest U.S. oil company, was down seven cents to $66.98, but fellow Dow component Chevron (CVX), the number two U.S. oil firm, was the Dow's top gainer on the day, adding 53 cents to close at $75.83. The oil services names were on the receiving end of most of the positive trade regarding the new drilling plan as Diamond Offshore (DO) and Transocean (RIG) both gained more than $3. National Oilwell Varco (NOV) and Schlumberger also finished the day higher and that helped the Oil Services HOLDRS ETF (OIH) gainn $2.01, or 1.67% to close at $122.59.

OIH Chart

Greece continues to be a problem even though the country has taken care of its April cash needs. That is just one month and Greece will need to raise another $15.6 billion by the end of May. The country is planning at least two dollar-denominated bond auctions in the next month to raise cash, but that news was not enough to prevent Moody's Investors Service from downgrading the debt and deposit ratings of five of the nine Greek banks in its coverage universe.

This news did not help the U.S. Dollar much, which was down today against 11 of the 16 major currencies, but with the Dollar weak and a lack of enthusiasm for the Euro still obvious, gold may be once again be a safe-haven for wary investors. Gold for April delivery gained $8.40 an ounce to close at $1112.50 today and it is worth noting that the the SPDR Gold Shares (GLD) is up nearly 2% in the past five days compared to 0.5% loss for the S&P 500.

Gold Chart

Speaking of bad news, tech investors got a big dose of troubling headlines after the close today when BlackBerry maker Research In Motion (RIMM) delivered fourth-quarter earnings results that certainly qualify as disappointing. The company said it earned $710.1 million, or $1.27 a share, in the fourth quarter, compared with $518.3 million, or 92 cents a share, a year earlier. Revenue jumped 18% to $4.08 billion, but analysts were expecting a profit of $1.28 a share on sales of $4.31 billion. RIMM shipped 10.5 million smart phones in the fourth quarter, fewer than the expected total of 11 million.

RIMM did offer an upbeat profit forecast for the current quarter, saying it expects to earn $1.31 to $1.38 a share. That is well ahead of the consensus estimate of $1.23 a share, but the Canadian company is forecasting revenue of $4.25 billion to $4.45 billion while analysts are expecting $4.33 billion. The company said it expects first-quarter gross margins in the neighborhood of 44.5% and is forecasting subscriber growth of 4.9 million to 5.2 million.

BNP Paribas initiated coverage of RIMM and rival Apple (AAPL) today with ''outperform'' ratings and noted that while an Apple partnership with Verizon (VZ) poses risks for RIMM, the growth of the BlackBerry in emerging markets should help buffer subscriber losses in developed markets. BNP Paribas put a $90 price target on RIMM and I bet the analyst would like to lower that number. RIMM closed at $73.97, but as of this writing, the stock is trading lower by $3.67, or 5%, to $69.89 in the after-hours session.

RIMM also said it expects its average selling price per phone to fall to $305 to $310 per phone in the current quarter, down from $311 per phone in the previous quarter. Combine those numbers with slumping shipments and perhaps it is apparent that RIMM is losing market share to the iPhone Google's (GOOG) Android.

RIMM Chart

On Monday I mentioned the aerospace sector as one group that has been showing a lot of strength and if you were looking for a pullback in some of that group's stronger constituents such as Boeing (BA), that pullback may have occurred today after the Dow component said it expects to take a $150 million first-quarter charge related to new health care reform bill. Boeing was down 1.25% on the news.

At this point, it is hard to reconcile the health news as good news from an investor's standpoint. In less than a week, AT&T (T), Boeing, Caterpillar (CAT) and 3M (MMM) form a quartet of Dow components saying the health care bill negatively impact first-quarter earnings. Throw in Deere (DE), Goodrich (GR) and Boeing rival Lockheed Martin (LMT), which said today it will take a $96 million charge in the first quarter, and it is clear that industrial names are being hampered by Uncle Sam.

Boeing Chart

Here we are at the end of the first quarter and stocks did not close the quarter in robust fashion. The Dow's almost 51-point haircut moved the index below support at 10,880 and if traders really fret about the jobs number on Thursday (the number is released on Friday, but the market is closed) then support at 10,825 could be washed away. The Dow is now a fair bit removed from resistance at 10,950 and assuming volume will be thin on Thursday, perhaps the best we can hope for the is the Dow holding 10,850 heading into the long weekend.

Dow Chart

The S&P 500 remains locked in a tight range, still hovering around the 1170 area. Again, I would not expect much action tomorrow, at least not much after the morning. If the S&P 500 can at least stay in its current neighborhood going into the next week, that might be a positive sign. After Friday's jobs report, first-quarter earnings will be the driver here. The destination is still unknown.

S&P 500 Chart

With RIMM's earnings announcement, we have a different set of circumstances for the Nasdaq. The Nasdaq was not all that impressive in March, save for Apple, and the RIMM news makes it difficult to envision a positive day for the Nasdaq on Thursday. I do not know if volume will be sufficient to force a break of support at 2385 tomorrow, but I find the prospects of a close above 2400 to be dubious.

Nasdaq Chart

I expect a volatile Thursday morning followed by some lethargic action for the rest of the day as traders head out of town to get an early start on the long weekend. RIMM is a bellwether name and that is going to hamper the Nasdaq and perhaps the broader market, so one more down day is likely in the offing.